"I don't believe you're really an economist," snarled the time share salesman for Spinnaker Resort of Hilton Head Island, S.C., as my family and I left without buying. Having just drawn for us a trash can to illustrate where our vacation rental payments were going, he no doubt felt deserving of the Nobel Prize.

Meanwhile, using the all-purpose formula

profitability = rental rate + appreciation rate - interest cost

For the rental rate, I noted that the rent for our vacation was $1200 for that week. His time share cost $11,900 to buy--call this $12,000. Simply dividing one by the other gives a 10 percent rental rate.

However, it is important to adjust this calculation for fees. The timeshare charged a maintenance fee of $433.25 per year, a membership fee of $200 per year, a publication subscription fee of $67 per year, and another fee of $93 per year, which I believe was a processing fee of some sort (I cannot be entirely sure that I have this straight, because when I tried to take the piece of paper on which I had written this down, the salesman tore it out of my hand).

The net rental value of the timeshare is $1200 minus all of the fees. Rounding to whole dollars, the rental value is $1200 - $793, or $407. Dividing this by the price of the time share, $11,900, gives 3.4 percent for the rental rate, which is the first figure required by the formula.

The other figures were supplied by the salesman. He used the classic timeshare salesman assumption that rent and prices will go up by 10 percent per year, so I used that for the appreciation rate. He said that the financing rate for us would be 17.9 percent, so I used that for the interest cost. The net result was:

profitability = 3.4 + 10.0 - 17.9 = - 4.5%

This quick calculation has some flaws. For example, I have assumed implicitly that the fees will go up at the same rate as rents. They could go up by more, or by less.

Also, our rental condo and his timeshare were not exactly identical. They were very close in terms of square footage and furnishings, but there were some differences:.

"I would never stay on a public beach," the salesman said, pointing out the value of the 24-hour security at the timeshare. "Anybody with a machine gun can go in there." Mercy! We thought: not only were we staying at the public beach, but we were letting our children swim without flak jackets!

Offsetting the value of the security guard was the fact that our rental was closer to the beach. We were right on the beach, while the timeshare was, according to the salesman, "A 4-minute walk to the beach." We later measured the distance as 7/10 of a mile, which takes 10-15 minutes to walk.

While perhaps a case can be made that beachfront rents will go up because such land is limited, I don't see that degree of scarcity in property 7/10 of a mile away. So, I don't think the 10 percent annual appreciation is something I would bank on.

Finally, I need to mention one thing. We were vacationing in August, when children are out of school. The timeshare offer was for mid-May, when I imagine you could rent an equivalent place for less than the cost of the annual fees. The price for August? $17,900. If they sell all 52 weeks, the total proceeds will be over $600,000--not bad for a $200,000 condo, especially when you factor in the additional fees that they are going to rake in.

I don't want to generalize and say that all timeshare salesman are sleazebags, only the ones that I've met. Nor do I mean to criticize people who buy timeshares. I'm sure I'll hear from some happy owners (I've gotten email from all 5 happy Amway distributors, thanks to my article on Make Money Fast).

Anyway, if you want to make a small investment in vacation property, here are some ideas for you to consider concerning timesharing:

1. Buy something you definitely will use, as opposed to something in the wrong place or for the wrong week. If you use it, the financial gain or loss won't be a big deal. If you don't use it, you're probably stuck with a dog of an investment.

2. Don't buy new. Because the shares are so ridiculously overpriced up front, they are bound to drop in the secondary market. Ads in Timesharing Today illustrate the drop in prices (when I looked I saw ads for Hilton Head time shares asking $5000 per week).

   The best prices might be on foreclosed time shares. My salesman told me that only people who already own timeshares are allowed to buy in later on. But look ahead two years from now, when some of those shares have foreclosed (and that 17.9 percent financing rate tells me they expect plenty of defaults). If someone offers to take the share off of their hands, are they going to refuse to take the money because that would be inconsistent with what the salesman told me?

3. Do your research. This is real estate, after all. Study comparable prices, rents, fees, terms and conditions, etc. Take your time, and negotiate aggressively. My 12-year old was appalled that we were being asked to make a long-term commitment in an hour and a half. She's got a point.

4. Make sure that everything important to you is in writing, and have your lawyer review the contract before you sign. I was told that I could always trade in my May week for an August week. Will they guarantee that in writing? I was told that some fees would be waived if I referred names of other potential buyers. Is that in the contract?

I think it is very important for people to understand what time sharing is all about. Not just the negatives, but the positives as well. It is very unfortunate that the time share developers often market their product like used car salesman. Not all are bad. Both of our purchases were not unpleasant experiences. There was no high pressure used. In fact after we decided to buy our first one ( Glen Ivy ), the VP of sales asked us many times if we were sure that we wanted to purchase. If you want to see some high pressure stuff, go to a presentation at one of the Mexican resorts (i.e. Puerto Vallarta). They can be pretty nasty. Our only regret is that we did not know about resales. Had we known, then we definitely would have purchased a used one.

One other very important point. I make it a practice to never buy any property outside my home state ( California ) and definitely not out of the US. I realize that not all states have resorts so exceptions have to be made. If there are any problems, it is much easier to address them in your home state. Also California protects the consumer better than most states.

Regards,

John

I agree with every comment you made about the perils of buying timeshares. I bought one in Indio, CA (Indio, for heaven's sake!). Paid $6500 for it and thought I was getting a good investment. About 10 years later, I sold it for $900 and then had to pay a $300 commission to the agent ! I was eager to get rid of it (could you tell?) and so was willing to take a major bath on it. Also, I was dumb enough to pay two companies in the business of selling timeshares money up front just so I could get rid of it. Anyone wanting to sell a timeshare should know---DON'T DO THAT! It's just money down the drain because you will never hear from them again. They prey on people who are desperate to be rid of their millstones which, in my situation, it was.

On the up side, I did exchange it twice for a week in Tahoe and a week in Vermont. That worked out fine, the exchanges were no problem except that it cost $93 for each exchange. Of course, I had to rent a car each time so that was an added expense that people probably don't think about. I also tried to exchange for Hawaii but there was nothing available.

If anyone out there is in the market for a timeshare, definitely buy a resale. They can be bought for a fraction of a new one. If you do that and exchange for other places, it can be a pleasurable experience. For investment purposes, it's probably the worst deal you could ever make.

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